What has been implemented under Obama is
strong economic medicine with a “human face”. “Promise
amid peril”. The stated priorities of the Obama economic
package are health, education, renewable energy, investment
in infrastructure and transporta­tion. “Quality
education” is at the forefront. Obama has also promised to
“make health care more affordable and accessible” for
every American.

At first sight, the budget proposal had
all the appearances of an expansionary program, a
demand-oriented “Second New Deal” geared towards
creating employment, rebuilding shattered social programs
and reviving the real economy.

The realities are
otherwise. Obama’s promise is based on a mammoth austerity
program. The entire fiscal structure is shat­tered, turned
upside down. To reach these stated objectives, a significant
hike in public spending on social programs (health,
education, housing, social security) would be required, as
well as the implementation of a large-scale public
investment program. Major shifts in the composition of
public expenditure would also be required, i.e. a move out
of a war economy, requiring a shift out of military-related
spending in favor of civilian programs.

In actuality, what
we are dealing with is the most drastic cur­tailment in
public spending in American history, leading to social havoc
and the potential impoverishment of millions of people. The
Obama promise largely serves the interests of Wall Street,
the defense contractors, the oil conglomerates and Big
Pharma. In turn, the Bush-Obama bank “bailouts” have led
America into a spiraling public debt crisis. The economic
and social dislocations are potentially devastating.

War
and the Economic Crisis

The worldwide meltdown of
financial markets occurs at the crossroads of a major
military adventure. The global financial crisis is
intimately related to the war. (For further analysis, see
chapters 9-12). A spiraling defense budget backlashes on the
civilian sectors of economic activity. The war economy has a
direct bearing on fiscal and monetary policy. Defense
appropria­tions are in excess of 700 billion dollars (for
the 2010 fiscal year). An impending fiscal crisis is looming
which threatens to under­mine the entire structure of
public spending.

“War is Good for Business”: the
powerful financial groups which routinely manipulate stock
markets, currency and com­modity markets, are also
promoting the continuation and esca­lation of the Middle
East war. The financial crisis is related to the structure
of U.S. public investment in the war economy versus the
funding, through tax dollars, of civilian social programs.
“More broadly, this also raises the issue of the role of
the US Treasury and the US monetary system, in relentlessly
financing the military industrial complex and the Middle
East war at the expense of most sectors of civilian economic
activity.”

The war is profit-driven, financed through
the massive worldwide expansion of dollar denominated debt.
War and globalization go hand in hand. Wall Street, the oil
companies and the defense contractors have concurrent and
overlapping interests. The oil companies were behind the
2008 speculative surge in crude oil prices on the London
energy market, which preceded the collapse of the stock
market in September-October of 2008. In turn, resulting from
the military agenda, the U.S. civilian economy is in crisis
as the nation’s resources, including tax dollars, are
diverted into funding a multibillion dollar Middle East
war.

Defense Outlays for the Wars in Iraq and
Afghanistan

This is a “war budget”. The austerity
measures hit all major fed­eral spending programs with the
exception of defense and the Middle East Central Asian War,
the Wall Street bank bailout and interest payments on a
staggering public debt. The nation’s bud­get diverts tax
revenues into financing the wars in Iraq and Afghanistan,
not to mention the set-up of new military bases in Colombia.
It legitimizes the fraudulent transfers of tax dollars to
the financial elites under the bank bailouts.

The pattern
of deficit spending is not expansionary. We are not dealing
with a Keynesian-style deficit which stimulates investment
and consumer demand, leading to an expansion of production
and employment. The bank bailouts (involving sev­eral
initiatives financed by tax dollars) constitute a component
of government expenditure. Both the Bush and Obama bank
bail­outs were handouts to major financial institutions.
They did not result in a positive spending injection into
the real economy. In fact, the opposite is true. The
bailouts have contributed to financ­ing the restructuring
of the banking system, leading to a massive concentration of
wealth and centralization of banking power.

A large part
of the bailout money granted by the U.S. government has
already been transferred electronically to various
affili­ated accounts including the hedge funds. The largest
banks in the U.S. are also using this windfall cash to buy
out their weaker competitors, thereby consolidating their
position. The tendency, therefore, is towards a new wave of
corporate buyouts, mergers and acquisitions in the financial
services industry.

In turn, the financial elites will use
these large amounts of liq­uid assets (paper wealth),
together with the hundreds of billions acquired through
speculative trade, to buy out real economy cor­porations
(airlines, the automobile industry, telecoms, media, etc.),
whose quoted value on the stock markets has tumbled. In
essence, a budget deficit (combined with massive cuts in
social programs) was required to fund the handouts to the
banks, as well as finance defense spending and the military
surge in both Iraq and Afghanistan.

Obama’s 2010
Budget

Obama’s budget for the 2010 fiscal year was of
the order of 3.94 trillion dollars, an increase of 32
percent. Total government rev­enues for the 2010 fiscal
year, according to estimates by the Bureau of Budget, were
quoted at 2.381 trillion dollars. This puts the predicted
budget deficit at 1.75 trillion dollars, equaling almost
twelve percent of the U.S. Gross Domestic Product.

1.
Defense spending of 534 billion dollars for 2010, a
supple­mental 130 billion dollars appropriation for fiscal
2010 for the wars in Afghanistan and Iraq, and a
supplemental 75.5 billion dollars emergency war funding for
the rest of the 2009 fiscal year. Defense spending and the
Middle East war, with various supplemental budgets, was
(offi­cially) of the order of 739.5 billion dollars. Some
estimates placed aggregate defense and military related
spending at over one trillion dollars.

2. A bank bailout
of 750 billion dollars announced by Obama, which was added
on to the 700 billion dollars in bailout money already
allocated by the outgoing Bush administration under the
Troubled Assets Relief Program (TARP). The total of both
programs is a staggering 1.45 trillion dollars, to be
financed by the Treasury. (See Table 1.3 next page). It
should be understood that the actual amount of cash
financial “aid” to the banks is significantly larger
than 1.45 trillion dollars.

3. Net interest on the
outstanding public debt was estimated by the Bureau of the
Budget at 164 billion dollars in 2010.

The magnitude of
these allocations is staggering. Under a “balanced
budget” criterion – which has been a priority of
gov­ernment economic policy since the Reagan era – almost
all the revenues of the federal government amounting to
2.381 trillion dollars would be used to finance the bank
bailout (1.45 trillion), the war (739.5 billion) and
interest payments on the public debt (164 billion). In other
words, no money would be left over for other categories of
public expenditure.

The Budget Deficit

Three categories
of expenditure, namely defense, the bank bail­out and
interest on the public debt, had virtually swallowed up the
entire 2010 federal government revenue of 2381.0 billion
dollars.

Moreover, as a basis of comparison, all the
revenue accruing from individual federal income taxes (1.061
trillion dollars in fis­cal 2010), that is, all the money
households across America paid annually in the form of
federal taxes, did not suffice to finance the handouts to
the banks, which officially amounted to 1.45 trillion
dollars. This amount includes the 700 billion dollars
granted during fiscal year 2009 under the TARP, program plus
the proposed 750 billion dollars granted by the Obama
administration.

Bush’s Troubled Assets Relief Program
and Obama’s 750 bil­lion dollar bank bailout – although
disbursed over more than one fiscal year – nonetheless
represented almost half of total gov­ernment expenditure
(half of Obama’s 3.94 trillion dollar budget for fiscal
2010), which was financed by regular sources of revenue
(2381 billion dollars), plus a staggering 1.75 trillion
dollar bud­get deficit, which ultimately required the
issuing of Treasury Bills and government bonds. The
feasibility of a large short-term expansion of the public
debt at a time of crisis was yet another matter,
particularly with interest rates at abysmally low
levels.

The budget deficit was 1.58 trillion dollars
according to offi­cial sources. Obama acknowledged a 1.3
trillion dollar budget deficit, inherited from the Bush
administration. In actuality, the budget deficit was much
larger. The official figures tended to underestimate the
seriousness of the budgetary predicament. The 1.58 trillion
dollar budget deficit figure was questionable because the
various amounts disbursed under TARP and other related bank
bailouts including Obama’s 750 billion dollar aid program
to financial institutions were not acknowledged in the
government’s expenditure accounts.

The aid hasn’t been
requested formally, but appears in a line item “for
potential additional financial stabilization efforts,”
ac­cording to the budget overview. The budget office
calculated a $250 billion net cost to taxpayers this year,
because it anticipates it would eventually recoup some,
though not all, of the money expended to help financial
companies.

The funds would come on top of the $700 billion
rescue package approved last October by Congress. The White
House budgets no money for fiscal 2010 and beyond for such
aid.

Fiscal Collapse

A major crisis of the federal
fiscal structure was in the making. The multibillion dollar
allocations to the war budget and to the Wall Street bank
bailout program backlash on all other catego­ries of public
expenditure. In November 2008, the federal govern­ment’s
bank rescue program was estimated at a staggering 8.5
trillion dollars, an amount equivalent to more than sixty
percent of the U.S. public debt estimated at fourteen
trillion dollars (2007). Meanwhile, under the Obama budget
proposal, 634 bil­lion dollars were allocated to a reserve
fund to finance universal health care.

At first glance, it
appears to be a large amount. But it is to be spent over a
ten year period, i.e. a modest annual commitment of 63.4
billion. Thus public spending will be slashed with a view to
curtailing a spiraling budget deficit. Health and education
pro­grams will not only remain heavily underfunded, they
will be cut, revamped and privatized.

The likely outcome
is the outright privatization of public ser­vices and the
sale of state assets, including public infrastructure, urban
services, highways and national parks. Fiscal collapse leads
to the privatization of the state. The fiscal crisis is
further exacer­bated by the compression of tax revenues
resulting from decline of the real economy. Unemployed
workers do not pay taxes, nor do bankrupt firms. The process
is cumulative. The solution to the fiscal crisis becomes the
cause of further collapse.

The Structure of the Public
Debt

This large-scale appropriation of liquid money assets
under the bank bailouts by a handful of financial
institutions serves to increase the public debt overnight.
When the U.S. Treasury under the Bush administration
allocates 700 billion dollars to the Troubled Assets Relief
Program, it constitutes a budgetary out­lay which
inevitably must be financed from within the structure of
government revenues and expenditures. A similar reasoning
applies to the bank bailouts under the Obama
presidency.

Unless all other categories of public
expenditure including health, education and social services
are slashed, the various out­lays under the bank bailouts
will require running a massive bud­get deficit, which in
turn will increase the U.S. public debt. Bear in mind, this
budget deficit is not expansionary (in the Keynesian
context). It does revive investment and consumer spending.
It has no direct bearing on the real economy. It is a money
transfer from U.S. tax payers into the coffers of a handful
of financial institutions.

America is the most indebted
country on earth. The United States (federal government)
gross public debt is currently of the order of fourteen
trillion dollars. This does not include mount­ing public
debts at the state and municipal levels.

This U.S. dollar
denominated (federal) debt is composed of outstanding
treasury bills and government bonds. The public debt, also
called “the national debt” is the amount of money owed
by the federal government to holders of U.S debt
instru­ments. These are held by American residents (as part
of their savings portfolios), companies and financial
institutions, U.S. government agencies, foreign governments
and individuals in foreign countries, but does not include
intergovernmental debt obligations or debt held in the
Social Security Trust Fund. Types of securities held by the
public include, but are not limited to, Treasury Bills,
Notes, Bonds, TIPS, United States Savings Bonds, and State
and Local Government Series securities.

The proposed
solution becomes the cause of the crisis. The 700 billion
dollar bailout under the Troubled Asset Relief Program,
combined with Obama’s 750 billion dollar aid package to
the financial services industry, is but the tip of the
iceberg. A panoply of bailout allocations in addition to the
700 billion dollars have been decided upon. Moreover, an
additional budget­ary overrun was implemented under
Obama’s stimulus package of 787 billion dollars launched
in February 2009 under The American Recovery and
Reinvestment Act of 2009. The stimulus package, as distinct
from Obama’s bank bailout program, is in part directed
towards the real economy.

Spiraling Public Debt
Crisis

Is the Treasury in a position to finance this
mounting budget deficit officially tagged at 1.58 trillion
dollars through the emis­sion of Treasury bills and
government bonds? The actual bud­get deficit is much
higher.

We are facing the largest ever budget deficit
coupled with the lowest interest rates in U.S. history. With
the Fed’s “near zero” percent discount rate, the
markets for U.S. dollar denominated government bonds and
Treasury bills are in a straightjacket. Moreover, the
essential functions of savings (which are central to the
functioning of a national economy) are in crisis.

Who
wants to invest in U.S. government debt? What is the demand
for Treasury bills at exceedingly low interest rates? The
market for U.S. dollar denominated debt instruments is
poten­tially at a standstill, which means that the Treasury
lacks the ability to finance its mammoth budget deficit
through public debt operations, leading the entire budgetary
process into a quandary. The question is whether China and
Japan will contin­ue to purchase U.S dollar denominated
debt instruments. Washington is running a public relations
campaign to lure Asian investors into buying T-bills and
U.S. government bonds.

With the markets for U.S. dollar
denominated debt (both domestically and internationally) in
crisis, further pressure will be exerted on the Treasury to
slash (civilian) public expenditure to the bone, exact user
fees for public services and sell off public assets,
including state infrastructure and institutions. In all
like­lihood, this crisis is leading us to the privatization
of the state, where activities hitherto under government
jurisdiction will be transferred into private hands.

Who
will be buying state assets at rock bottom prices? The
financial elites, who are also the recipients of the bank
bailout.

Consolidation of the Banks

A massive amount of
liquidity has been injected into the finan­cial system,
from the bailouts but also from pension funds, individual
savings, etc. The stated objective of the bank bailout
programs is to alleviate the banks’ burden of bad debts
and non-performing loans. In actuality what is happening is
that these massive amounts of money are being used by a
handful of institutions to consolidate their position in
global banking. The exposure of the banks, largely the
result of derivative trade, is estimated in the tens of
trillions of dollars, to the extent that the amounts and
guarantees granted by the Treasury and the Fed will not
resolve the crisis. Nor are they intended to resolve the
crisis.

The mainstream media suggests that the banks are
being nationalized as a result of TARP. In fact, it is
exactly the opposite: the state is being taken over by the
banks, the state is being priva­tized. The establishment of
a worldwide unipolar financial system is part of the broader
project of the Wall Street financial elites to establish the
contours of a world government.

In a bitter irony, the
recipients of the bailout under TARP and Obama’s proposed
750 billion dollar aid to financial institutions are the
creditors of the federal government. The Wall Street banks
are the brokers and underwriters of the U.S. public debt.
Although they hold only a portion of the debt, they transact
and trade in U.S. dollar denominated public debt instruments
world­wide. They act as creditors of the U.S. State; they
evaluate the creditworthiness of the U.S. government; they
rank the public debt through Moody’s and Standard and
Poor; they control the U.S. Treasury, the Federal Reserve
Board and the U.S. Congress; they oversee and dictate fiscal
and monetary policy, ensuring that the state acts in their
interest. The government hands mon­ey to assist the banks
under the bank bailout. As a result, its cred­it rating
established by Wall Street is affected.

The U.S.
Government Finances its Own Indebtedness: Circular and
Contradictory Relationship

Since the Reagan era, Wall
Street dominates most areas of eco­nomic and social policy.
It sets the budgetary agenda, ensuring the curtailment of
social expenditures. Wall Street preaches bal­anced budgets
but the practice has been to lobby for the elimina­tion of
corporate taxes, grant handouts to corporations and tax
write-offs in mergers and acquisitions, all of which lead to
a spi­raling public debt. It oversees the U.S. public debt
and the banks are involved in the sale of treasury bills and
government bonds on financial markets in the U.S. and around
the world. They also hold part of the public debt and are
the creditors of the U.S. government.

In a bitter irony,
the massive increase in the public debt (2009-2010) required
to “rescue the banks” was financed and brokered by the
financial institutions which were the direct beneficiaries
of the Bush and Obama bank bailouts.

The Federal Reserve
System is a privately owned central bank. While the Federal
Reserve Board is a government body, the pro­cess of money
creation is controlled by the twelve Federal Reserve banks,
which are privately owned. The shareholders of the Federal
Reserve banks (with the New York Federal Reserve Bank
playing a dominant role) are among America’s most powerful
financial institutions.

The increase in the U.S. public
debt in 2009-2010 was a direct result of the bailout monies
transferred to the banks. To finance the bank bailouts, the
Treasury was obliged to run up a massive budget deficit.
While the Federal Reserve creates money out of thin air, the
multibillion dollar outlays of the Treasury (includ­ing the
Bush and Obama bank bailouts) required a massive emis­sion
of public debt in the form of Treasury Bills and government
bonds. Only part of these T-Bills are held by the Fed.

We
are dealing with a pernicious circular relationship. When
the banks pressured the Treasury to assist them in the form
of a major bank rescue operation, it was understood from the
outset in September 2008 that the banks as creditors would
in turn “assist” the Treasury in coping with a
skyrocketing public debt.

Public opinion had been misled.
A diabolical circular process had been set in motion. The
U.S. government is in a sense financ­ing its own
indebtedness: the money granted to the banks is in part
financed by borrowing from the banks. To finance the 1.45
trillion dollar bailout, the government needs to borrow,
through the emission of public debt. Where does the
government go? To the banks. In other words, with the money
the banks lend to the government, the Treasury finances the
bailout in favor of the banks.

In turn, the banks impose
conditionalities on the management of the U.S. public debt.
They dictate how the money should be spent. After having
cashed in on their bailout money, they impose “fiscal
responsibility” on the U.S. Treasury; they demand massive
cuts in public spending, which eventually results in the
collapse and/or privatization of public services; they
impose the privatization of urban infrastructure, roads,
sewer and water systems, public recreational areas –
everything is up for privatization.

This public debt
crisis triggered by Wall Street is all the more serious
because the U.S. federal government does not control
monetary policy. All public debt operations go through the
Federal Reserve, which is in charge of monetary policy,
acting on behalf of private financial interests. The
government as such has no authority over money creation.
This means that public debt operations essentially serve the
interests of the banks.

Where is the Money Going?

The
Obama economic stimulus program constitutes a continua­tion
of the Bush administration’s bank bailout packages. The
proposed policy solution to the crisis becomes the cause,
ulti­mately resulting in further real economy bankruptcies
and a cor­responding collapse of the standard of living of
Americans. Both the Bush and Obama bank bailouts are
intended to come to the rescue of troubled financial
institutions, to ensure the payment of “inter-bank” debt
operations. In practice, large amounts of money transit
through the banking system, from the banks to the hedge
funds, to offshore banking havens and back to the
banks.

The government and the media tend to focus on the
ambigu­ous notion of “inter-bank debts”. The identity
of the ultimate creditors is rarely mentioned The legitimacy
of the creditors is never questioned. Multibillion dollar
transfers are conducted electronically from one financial
entity to another Where is the money going? Who is
collecting these multibillion debts, which are in large part
the consequence of financial manipulation and derivative
trade?

There are indications that the financial
institutions are trans­ferring billions of dollars into
their affiliated financial entities and hedge funds. From
these hedge funds, money is also being used to acquire real
economy assets. Through what circuitous financial mechanisms
were these debts created? Where is the bailout money going?
Who is cashing in on the multibillion dol­lar government
bailout money? This process is contributing to an
unprecedented concentration of private wealth.

Financial
manipulation is an integral part of the New World Order. It
constitutes a powerful means to accumulate wealth. It has
contributed to destabilizing the U.S. fiscal structure.
Under the present political arrangement, those responsible
for mone­tary policy are quite deliberately serving the
interests of the financiers, to the detriment of working
people, leading to eco­nomic dislocation, unemployment and
mass poverty.

More generally, this restructuring of global
financial markets and institutions (alongside the pillage of
national economies) has enabled the accumulation of vast
amounts of private wealth, a large portion of which has been
amassed as a result of strictly speculative transactions.
This critical drain of billions of dollars of household
savings and state tax revenues paralyzes the func­tions of
government spending and spurs the accumulation of a public
debt, which can no longer be financed through the emis­sion
of U.S. dollar denominated debt instruments.

What we are
dealing with is the fraudulent confiscation of life­long
savings and pension funds and the appropriation of tax
rev­enues to finance the bank bailouts. To understand what
has hap­pened, follow the money trail of electronic
transfers with a view to establishing where the money has
gone. What is at stake is the outright criminalization of
the financial system, financial theft on an unprecedented
scale.

The monetary system, which is integrated into the
state bud­getary process, has been destabilized. The
fundamental relation­ship between the monetary system and
the real economy is in crisis. The creation of money “out
of thin air” threatens the value of the U.S. dollar as an
international currency. Similarly, the financing of a
mammoth U.S. budget deficit through dollar denominated debt
instruments is impaired as a result of exceed­ingly low
interest rates. Moreover, the process of household sav­ings
is undermined with interest rates close to zero.

What we
have dealt with in this chapter is one central aspect of an
evolving process of global financial collapse. While the
finan­cial apparatus has not collapsed, the Great
Depression of the 21st century is by no means over. We can
expect a renewed wave of bank failures, mergers and
acquisitions in the years to come.

Financial
Disarmament

The complexity of this crisis is overwhelming.
While specific ad hoc measures including the freeze of
speculative trade can be envisaged, there are no ready
solutions under the prevailing global financial
architecture. What is at stake is the power con­figuration
behind these measures. Economic policy quite deliberately
serves the interests of the financial elites, who in turn
control the political process. Meaningful policies cannot be
achieved without radically reforming the workings of the
inter­national banking system.

What is required is an
overhaul of the monetary system includ­ing the functions
and ownership of the central bank, the arrest and
prosecution of those involved in financial fraud both in the
financial system and in governmental agencies, the freeze of
all accounts where fraudulent transfers have been deposited
and the cancellation of debts resulting from fraudulent
trade and/or market manipulation.

People across the land,
nationally and internationally, must mobilize. This struggle
to democratize the financial and fiscal apparatus must be
broad-based and democratic, encompassing all sectors of
society at all levels, in all countries. What is
ulti­mately required is to disarm the financial
establishment:

– confiscate those assets which were
obtained through fraud and financial manipulation

–
restore the savings of households through reverse
transfers

– restore home ownership to those who lost
their homes through the process of foreclosures

– return
the bailout money to the Treasury

– freeze the
activities of the hedge funds

– freeze the gamut of
speculative transactions including short-selling and
derivative trade

Disclaimer: The views expressed in
this article are the sole responsibility of the author and
do not necessarily reflect those of the Centre for Research
on Globalization.

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